Chapter 6
Supply network design
Source: Getty Images
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Supply network design
Process design
Operations
strategy
Supply network design
Layout
and flow
Process
technology
Design
Job
design
Product/service
design
Operations
management
Improvement
Planning and
control
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Operations in practice
Source: Corbis/ Gianni Giansanti/ Sygma
Michael Dell started in 1984 by cutting out the ‘middle man’ and
delivering computers direct to the customer
Using its direct selling methods, Dell went on to become the number
one computer maker
There are many reasons for Dell’s success but most of them come
from the way Dell configures its supply networks
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Operations network for a plastic homeware company
Second-tier
suppliers
Chemical
company
Second-tier
customers
Wholesaler
Retailer
Plastic
stockist
Cardboard
company
Ink
supplier
First-tier
customers
First-tier
suppliers
Plastic
homeware
manufacturer
Retailer
Packaging
supplier
Direct supply
Information
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Operations network for a shopping mall
Second-tier
suppliers
Recruitment
agency
First-tier
suppliers
First-tier
customers
Second-tier
customers
Retailers
Retail
customers
Security
services
Cleaning
materials
supplier
Cleaning
services
Equipment
supplier
Maintenance
services
Shopping
mall
Direct supply
Information
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Operations performance should be seen
as a whole supply chain issue
Benefits of looking at the whole supply chain include
It helps an understanding of competitiveness
It helps to identify the significant links in the network
It helps focus on long-term issues
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Direction, extent and balance of vertical integration
Balance – Should excess capacity
be used to supply other companies?
Raw
material
suppliers
Component
maker
Assembly
operation
Wholesaler
Retailer
Extent – Narrow process span
Extent – Wide process span
Direction –
Upstream vertical
integration
Direction –
Downstream vertical
integration
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
The decision logic of outsourcing
Is activity of
strategic
importance?
Yes
Does
No company have No
specialized
knowledge?
Yes
Is company’s
operations
performance
superior?
No
Yes
Is significant
operations No
performance
improvement
likely?
Explore
outsourcing
this activity
Yes
Explore keeping this activity in-house
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Supply-side and demand-side factors
in location decisions
Examples of demand-side
factors that vary with
location, influencing
customer service/revenue
Examples of supply-side
factors that vary with
location, influencing costs
labour costs
land costs
energy costs
transportation costs
community factors
The
operation
labour skills
suitability of site
image
convenience for customers
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Cost breakdown of a shirt made in various countries
and sold in France
€15.55
France
€14.33
Portugal
Turkey
€11.43
Thailand
€11.43
Labour
€11.13
Morocco
Transport
€10.82
Romania
Fabric
€10.37
China
Supplies
€9.60
Myanmar
0
2
4
8
6
Cost in euros
10
12
Customs duties
14
16
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Location – Where is the market?
Population
density
Low
High
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
The balance of capacity
Capacity can either lead or lag demand
Inventory can be used to smooth out the peaks
Spare capacity can be used to supply other
operations
The danger of this is that the original operation
may receive a lower level of service
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Real cost per customer served
Unit cost curves for individual service centres of
varying capacities
Cost curve for 5
bay service centre
Cost curve for 10
bay service centre
‘Economy of scale’
curve for hotel
Economies
capacity
of scale
Cost curve for 15
bay service centre
Diseconomies
of scale
5
10
Average number of bays in use
15
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Capacity leading demand and capacity lagging demand
Capacity leads demand
Capacity lags demand
Demand
Time
Volume
Volume
Capacity
Demand
Capacity
Time
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Smoothing with inventory
Volume
Capacity
Demand
Time
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Key Terms Test
Demand side
The chains of customers, customers’ customers, etc., that
receive the products and services produced by an operation.
First-tier
The description applied to suppliers and customers who are in
immediate relationships with an operation with no
intermediary operations.
Second-tier
The description applied to suppliers and customers who are
separated from the operation only by first-tier suppliers and
customers.
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Key Terms Test
Immediate supply network
The suppliers and customers who have direct contact with
an operation.
Total supply network
All the suppliers and customers who are involved in supply
chains that ‘pass through’ an operation.
Downstream
The other operations in a supply chain between the
operation being considered and the end customer.
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Key Terms Test
Upstream
The other operations in a supply chain that are towards the
supply side of the operation.
Outsourcing
The practice of contracting out to a supplier work previously
done within the operation.
Vertical integration
The extent to which an operation chooses to ‘own’ the
network of processes that produce a product or service;
often associated with the ‘do or buy’ decision.
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Key Terms Test
Location
The geographical position of an operation or process.
Long-term capacity management
The set of decisions that determine the level of physical capacity
of an operation in whatever the operation considers to be
‘long-term’; this varies between industries, but is usually in
excess of one year.
Disintermediation
The emergence of an operation in a supply network that
separates two operations that were previously in direct
contact.
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Key Terms Test
Spatially variable costs
The costs that are significant in the location decision that vary with
geographical position.
Weighted-score method
A technique for comparing the attractiveness of alternative locations
that allocates a score to the factors that are significant in the
decision and weights each score by the significance of the factor.
Centre-of-gravity method
A technique that uses the physical analogy of balance to determine
the geographical location that balances the weighted importance
of the other operations with which the one being located has a
direct relationship.
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Key Terms Test
Fixed-cost breaks
The volumes of output at which it is necessary to invest in
operations facilities that bear a fixed cost.
Economies of scale
The manner in which the costs of running an operation
decrease as it gets larger.
Diseconomies of scale
A term used to describe the extra costs that are incurred in
running an operation as it gets larger.
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Key Terms Test
Capacity leading
The strategy of planning capacity levels such that they are
always greater than or equal to forecast demand.
Capacity lagging
The strategy of planning capacity levels such that they are
always less than or equal to forecast demand.
Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007